The Decline of Oil – Time to shake off a bad habit

 

Decline of Oil

Lost Hills Oil Field, California

World oil consumption has increased overall in almost every single year since the IEA (International Energy Agency) began recording and publishing the data. It might seem a bit far fetched to predict the decline of oil is close but some of the signs are already there to be seen. All we had to do was some light reading into Government policy, global economics, the social and cultural shifts caused by climate change, and some of the advancements being made in technology to see that the outlook for oil is, well, not great. The primary focus of this article will be on the economics associated with oil usage and factors which could have the biggest impact on the future of oil.

 

According to BP, there is currently around about 50 years of proven global oil reserves left based on current global production. The key word being used here is ‘proven’ oil reserves, meaning that the estimate only takes into account the amount of oil which is economically accessible by current technology and market prices, aka this figure is likely to change and continue changing as it has done since they first started grabbing headlines with it.

A prime example of the economics of oil production and the constant changes to what is considered ‘economically accessible’ was seen in the last few years (2014-2017) as the price of oil collapsed from over $100 a barrel to under $50. This was due to increased supply mainly from OPEC (Saudi Arabia and the neighboring oil cartels… I mean countries) in an effort to grab a bigger market share of the global oil supply. A re-balancing effect has since occurred which put simply was: too much supply; the least profitable sources of oil became unprofitable (*economically non-accessible) and got shut down or went out of business = balanced supply/demand at a reduced price. Basic economics in action!

Another example of economics in the energy market and what could potentially be a parallel for oil in the years to come is coal production and its usage for electricity generation in the UK. In 2009 Ed Miliband (the eventual leader of the Labour party in the UK) envisioned ‘clean coal’ – coal Power Stations using Carbon Capture technology, being a major part of the UK’s electricity generation mix. 9 years later and there are almost no coal power stations left in the UK. It’s gone from supplying 40% of the UK’s electricity in 2012 to less than 2% in 2017. By 2025 there will not be any coal power stations left in the UK. If you didn’t already know you might have guessed Ed Miliband did not win an election. Government policy in the UK shifted away from coal electricity production and by creating a ‘carbon tax’, many coal power stations became unprofitable overnight and have shut down as quickly as they could. The UK had its first full coal free power day in April 2017.

Once again we’re back to the economics controlling the change, put simply when something doesn’t make money companies are very quick to not wanting to do it anymore.

There are many things that are going to challenge oil demand. An oil usage breakdown (p33) compiled by the International Energy Agency shows that in 2014 transport accounted for a whopping 64.5% of total crude oil consumption, it stands to reason that this is exactly where the biggest changes are going to happen. Volvo recently joined a host of other European car manufacturers in announcing a switch to electric and hybrid engines on all cars from 2019. The French President recently announced plans to ban the sale of petrol and diesel cars by 2040,  which Britain has since quickly followed the lead of France and announced the exact same policy. Essentially 130 years after the commercialization of the internal combustion engine, Volvo, Britain, and France are giving up on it. Performance wise electric cars have improved immensely in recent years, a prime example being Tesla’s new model 3 having a 300+ mile range on a full charge, for car manufacturers the race to match and better the performance of petrol and diesel cars is on!

Now as mentioned at the start of the article oil consumption has been increasing globally, however, this is due to increased demand in Asia. In Europe oil consumption has actually been decreasing for some time for a variety of reasons: better fuel efficiency, new city/road driving taxes and most people already owning cars to name a few. Economists say that peak oil consumption may already have occurred in Europe and according to the second biggest oil producer, Shell, peak oil could happen globally within 5-15 years. One argument for the continued increase in oil consumption is that China, India and other countries with rapidly expanding economies will continue taking up the slack from falling consumption in Western countries. Although this is currently what is happening the reality is that they like everyone else do not want the drawbacks of fossil fuels any more than western countries, here’s an example…

Smog cloud in Beijing

Smog cloud in Beijing.

It is well known that China has a serious smog issue inside its major cities. This is the ‘not so unseen cost’ of relying on fossil fuels to power an economy, the health implications. Research examining the life expectancy of the average person living in northern China concluded that air pollution has caused a decrease of 5.5 years, the medical costs associated with this are huge. As a result, China is setting stringent emissions standards (with an emphasis toward gas and electric powered vehicles) similar to what has been done in Europe. China is also investing heavily in battery technology along with renewable energy, it plans to move to a cleaner more sustainable fuel source as soon as it is economically viable.

In other parts of the world, attempts are being made to take Government policy in the opposite direction. Despite the best efforts of a certain President to take America back in time (cough* cough* it’s Donald Trump) by pulling out of the Paris Climate Accord, the backlash he got from both world leaders and the public tells its own story, many individual states and companies are continuing efforts to meet the targets set out in the accord. There are others attempting to stand in the way of change. Remember the time Exxon forgot to tell everyone about Climate change for 40 years and continuously denied its existence by mistake. Consumers want cleaner energy and governments are responding, albeit slowly, changes in Government energy policy are key to the decline of oil.

People have predicted Peak Oil and its subsequent decline in the past and famously always been wrong. I’m not going to make the same mistake by putting a date on the decline, we just know it’s coming soon (definition of soon here being sometime in the future), sorry for not making a more concrete forecast but open ended predictions always come true and I like being right. On a more serious note, it is no longer a possibility but an inevitability that energy markets move away from oil and other fossil fuels before the global oil supply is depleted. It’s just in our best interests to do so.